Fed under siege in new Washington landscape

Concern the attacks may damage Fed program to assist economy

WASHINGTON (MarketWatch) — The four Republicans expected to lead the House and Senate in the new Congress raised concerns Wednesday with the Federal Reserve’s recent decision to launch a $600 billion bond-buying program, the latest in a slew of political attacks on the central bank following the midterm election earlier this month.

News Hub: Key Fed members defend QE2 From attacks

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Jon Hilsenrath talks about Fed officials, including Janet Yellen and William Dudley, who say the stimulus plan is an attempt to boost U.S. growth, not weaken the dollar or raise inflation above 2%.

Analysts are concerned that the heat from the debate may force the Fed to limit its bond-buying program and also weaken its beneficial effects.

Political scientists agree that the midterm election strengthened the extreme wings of both the Republican and Democratic parties at the expense of moderates who were natural allies of the central bank.

The latest salvo at the Fed came in a letter signed by Republican Senate leader Mitch McConnell and Rep. John Boehner, the House Republican leader who will be the next Speaker of the House and their top deputies, Senator John Kyl of Arizona and Rep. Eric Cantor of Virginia.

The Republican leaders complained the bond buying program “introduces significant uncertainty regarding the future strength of the dollar,” and “perhaps more damaging, we believe that [the Fed bond buying program] is giving the impression that the Federal Reserve will keep making new and different attempts to boost the short-term prospects of the economy.”

Georgetown University political science professor Stephen Wayne said Republicans “are expressing their opposition to government interference in the capitalistic system.”

The party is also skeptical about Fed chairman Ben Bernanke, Wayne said. Bernanke does not enjoy the respect that Republicans gave former Fed chief Alan Greenspan.

Meanwhile, liberal Democrats are upset at the Fed for not doing enough to bring down the unemployment rate that has been stuck just under 10% all year.

Earlier this year, Bernanke was confirmed for a second four-year term but 30 Senators voted against him, more opposition than any previous Fed chief. The most liberal and conservative members of the chamber voted against him.

Earlier this week, another group of Republicans launched a campaign to limit the Fed to one single task — keeping prices stable.

At the moment, the Fed has two goals: stable prices and full employment.

“It is time once again to demand that the Federal Reserve focus exclusively on price stability and protecting the dollar,” said Rep. Mike Pence, Republican of Indiana and chairman of the House Republican Conference, in a speech on the House floor Wednesday.

Analysts said the measure was another attempt to limit the scope of the Fed’s activities.

“There is a very long tradition in American political life of being suspicious of banks and politicians and a central bank combines the two,” said Vincent Reinhart, a former top Fed staffer and now analyst at the American Enterprise Institute.

The Fed was at the forefront of the unpopular government efforts to shore-up the banking system in the wake of the financial crisis, and helped rescue American International Group while letting Lehman Brothers Holding Co fail.

Rep. Ron Paul of Texas, an icon of the tea-party movement and the father of the new Kentucky Republican Senator Rand Paul, is the author of a book called “End the Fed.”

Reinhart said he was concerned the political storm may strengthen the opposition to the bond-buying program inside the Fed.

Long-term rates have risen in recent days and it could be said that some critical comments from Fed insiders were the cause of the back-up, he said.

Many economists have argued that the Fed may want to go even further than the $600 billion announced earlier this month, but now there are serious doubts about whether the central bank will even get that far.

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